CA counters report on accounting practices

Reeling from a Sunday New York Times story accusing mainframe software maker Computer Associates (CA) of misleading accounting practices, the company's executives punched back in a Web-broadcast teleconference Monday, calling the article unfair.

CA changed its business model last year to allow for short-term licensing contracts for its software. The move prevents dramatic price changes for its products during a quarter, an effect Chief Executive Officer and President Sanjay Kumar called the "hockey stick" phenomenon -- flat sales until the end of a quarter when a company drops prices to book sales.

Kumar said its previous model "is not sustainable. We believe the new business model will help alleviate the effect."

The new business model comes with accounting changes, however. Revenue for licenses is recorded differently than "maintenance" revenue for upkeep of software. Software companies record all license revenue up front, while maintenance revenue is booked month by month as it is paid.

The Times charges CA of having used abstract accounting methods to shift revenue from one category to another for years in order to show revenue growth. It also pointed to a substantial difference between its pro forma, pro rata earnings and earnings reported under generally accepted accounting principles.

Kumar said many other companies use pro forma accounting, including its competitors, and that it more accurately reflects CA's finances. "Revenue under the old business model and the new business model is not comparable," he said. "As many analysts will say, the model is completely transparent and provides better predictability."

CA's accounting firm, KPMG LLP, said the company has conformed to standard accounting principles. Company officials are not aware of any investigation by the U.S. Securities and Exchange Commission, said Ira Zar, chief financial officer for CA.

The highly critical story also said CA moved to a new business model because CA was running out of competitors to buy and could not shift revenue anymore. Citing unnamed sources, the Times said CA inflated revenue growth in its Unicenter client-server product by buying large competitors and reworking the contracts of the newly acquired clients to show Unicenter sales at companies that actually may not use the software.

The Times report said that CA books what typically would be considered maintenance revenue from the newly acquired clients as new license Unicenter revenue, whether or not the users actually make use of the Unicenter software. Therefore fewer users may be using the company's flagship product -- which the company often touts as key to the future of its business -- than the accounting practice may lead observers to think, according to the article.

Kumar pointed to BellSouth Corp., Allstate Insurance Co. and other companies using Unicenter to refute the claim.

T1Xpert Chief Operating Officer Tom Price signed on as a Unicenter client just a few weeks ago. "We had looked around. We liked the CA name, and they had a reliable reputation," he said.

Price declined to name the other vendors considered by his firm, which develops software for the securities industry. He said CA's flexible licensing structure, a key aspect of its new business model, was an attractive feature.

T1Xpert is in the process of installing Unicenter. Price said the installation is going smoothly, and that his company has been happy with CA so far.

The story plays to some existing mistrust of the company within the computer industry, said analysts. Three CA senior executives were ordered to pay back US$550 million to the company by a Delaware judge who found in a shareholder suit that they had received excessive compensation. CA has also missed earnings estimates on occasion, said Sarah Mattson, an analyst from Dain Rauscher Wessels.

"We were very skeptical about how it (the new business model) would be received because it was so confusing," she said. "It's confusing because it's completely new. Because there's no history to compare it to, they can construct the numbers in way that's more favorable ... There's already a little bit of distrust about CA in the market, and this kind of plays into it."

She has given the company a "neutral" rating for investors, having downgraded it on March 2 from a "buy" rating. "That kind of highlights where I think the company is relative to the competition. ... I think the stock is pretty fairly valued at current levels."

Shares of CA were down $4.20 -- about 12 percent -- to $31.05 on the New York Stock Exchange on Monday morning.

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